Inflation may be falling, but rupiah hit by rally
JAKARTA (JP): Inflation in October is expected to be zero and could even begin to fall on the back of lower food prices and the strengthening rupiah, Bank Indonesia Governor Sjahril Sabirin said on Wednesday.
He said the economy witnessed disinflation during the first three weeks of this month due to lower food prices, particularly for rice.
"My predictions suggest that inflation in October will be close to zero or less," he told reporters before meeting with the Coordinating Minister for Economy, Finance and Industry Ginandjar Kartasasmita.
"And I think inflation in the coming months will continue to be favorable as a result of the strengthening of the rupiah, which will lower the price of imported goods," he said.
He added that people were no longer anticipating high inflation as a result of considerable appreciation in the value of the rupiah against the U.S. dollar and signs of improvement in the economy.
Inflation in September fell to 3.75 percent from 6.30 percent in August. The annualized inflation rate lies at just over 82 percent, slightly above the government's year-end target of 80 percent.
"If this (low inflation) remains and the exchange rate continues to strengthen or at least stay at current levels, there will be more room for us to lower interest rates," Sjahril said.
He declined to state the year-end target for interest rates.
However, Bank Indonesia director Miranda Goeltom said last week there was a chance that interest rates could fall to between 40 percent and 50 percent by the year's end on the back of favorable developments in the rupiah and the rate of inflation.
Since the outbreak of the economic crisis last July, the central bank's main priority has been to stabilize the rupiah and curb inflation by pursuing a policy of high interest rates.
Positive developments on the inflation and currency front, however, have prompted the monetary authorities to gradually relax their stance in recent weeks. The interest rate on the central bank's benchmark one-month promissory notes (SBIs) was cut to 56.18 percent on Wednesday, compared to 70 percent last month.
The business sector still views interest rates here, the most punitive in the region, as prohibitively high and has urged the central bank to make further cuts on the back of the strengthening rupiah.
The rupiah has rallied impressively over the past several weeks and now stands at around Rp 7,500 to the U.S. dollar, when last month it stood at over Rp 11,000 and in June was trading for around Rp 14,000.
Sjahril said on Tuesday that he was optimistic the rupiah would strengthen further on the back of improvements in the economy and the increasing credibility of the government's program of economic reform.
Rupiah
The rupiah closed slightly lower at 7,625 against the American dollar on Wednesday, with traders complaining that most market participants were afraid to build any position on the rupiah as political tension builds in the run-up to the special session of the People's Consultative Assembly (MPR), which is scheduled for Nov. 10 to Nov. 13.
"I think the student demonstration was the main reason behind the fall of the rupiah against the dollar on Wednesday," a chief dealer with a local private bank said.
More than 7,000 students staged a peaceful rally outside the House of Representative's (DPR) to demand President B.J. Habibie's five-month-old government be replaced.
The demonstration, which came as the nation was marking the 70th anniversary of Youth Pledge Day, scared most investors away from the local currency market.
Dealers said the rupiah, which traded in a range between 7,450 and 7,750, closed lower at 7,625 against the dollar after hitting an intraday day high of 7,450.
Wednesday's close was three percent lower than Tuesday's close at 7,400.
Currency dealers said that persistent dollar selling by several state banks had prevented the rupiah from breaking through the 8,000 barrier on Wednesday.
"If there had been no dollar selling by state banks, the rupiah could have broken the 8,000 level," another dealer said, predicting that sentiment on the rupiah would remain bleak in the days ahead.
Stock prices in the Jakarta Stock Exchange (JSX) fell 5.81 points (1.3 percent) to 312.29 on a total turnover of 273.20 million shares valued at Rp 224.99 billion (US$29.60 million).
Losers led gainers by 58 to 17 with stocks in 78 companies remaining unchanged.
Head of Panin Sekuritas Anton Karlam and Head of Trimegah Securindolestari attributed the fall in stock prices to a negative market reaction to the student demonstration at the DPR.
"Political tension has killed investors' confidence in the local market,' Anton said. (rei/aly)b